How to Track and Manage Inventory in Xero

I have said for a long time that whoever gets inventory done in a cloud accounting product wins. Xero has done it. They came up with it first, and I think you will find that as with all things Xero and what we’ve come to expect, Inventory works and it works well. The feature was rolled out earlier this year so I figured it was high time I showed you how to track and manage inventory in Xero.

To understand how to track and manage inventory with Xero you must understand how inventory works. Here’s a quick inventory 101 lesson.

In a very simple inventory example, you want to buy something at one price and then sell it for (hopefully) something more. Meanwhile as I am buying my inventory I need to be able to keep track of it. How many have I bought? How many have I sold? How many are left? What is my average cost.

I didn’t cover this in the video (one of the benefits of reading). If you click on an item in the inventory are within Xero you will see something that looks like this:

This should answer all of the questions I just posed above. This should make it fairly easy to track and manage inventory in Xero.

The trick to how you track and manage inventory in Xero is in setting up your inventory item. Once you click “I track this item” the “Expense” account drop down changes to a “Cost of Goods Sold” account drop down. It’s actually really cool – that part IS covered in the video. Now that we can establish a cost of goods sold account as well as the inventory asset and the sales account, we have everything we need to track and manage inventory in Xero.

You have to understand the inventory cycle. When you buy inventory it increases an asset. When you sell inventory it decreases the inventory asset, and increases cost of goods sold. You also increase sales and accounts receivable. Of course once you set up an item as inventory in Xero, Xero will handle the accounting accordingly. And THAT is how you track and manage your inventory in Xero. Ready to see what this looks like? Watch the video if you haven’t already and please post your comments and questions below.

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